Expert Quotes | UW News Blog
November 16, 2022
Buy-now-pay-later spending is projected to reach $1 trillion globally by 2025, but little is known about its impact.Pixabay
Buy Now Pay Later platforms like Afterpay and Affirm offer consumers near-instant access to credit for retail purchases without a hard credit check. While BNPL spending is expected to reach $1 trillion globally by 2025, little is known about its effects.
BNPL, which usually appears as an option during checkout on a retailer’s website, most often requires an upfront payment followed by three payments every two weeks. Although there are no charges if payments are made on time, missed payments may result in late charges from the BNPL supplier and overdraft charges from the customer’s bank.
Total BNPL loans issued by top US providers tripled in one year from $8.3 billion in 2020 to $24.2 billion in 2021. BNPL can benefit consumers with no credit or replace high-interest credit cards or payday loans, but it can also allow customers to overspend and bear the financial consequences.
Past studies have shown that 70% of consumers report spending more with BNPL than they would otherwise, 42% have missed payments and 25% have signed up for BNPL to avoid a hard inquiry that could affect one’s credit score. person and remain on a credit report for a long time up to two years. Soft checks do not affect credit scores.
Ed de Haan, associate professor of accounting at the University of Washington’s Foster School of Business, studies BNPL’s impact on financial health. His research found that compared to non-users, BNPL users faced a rapid increase in bank overdraft charges and credit card interest and charges.
Ahead of the biggest retail spending season of the year, UW News spoke with deHaan to learn more about BNPL.
What are the risks associated with BNPL?
Ed de Haan: Financial technology companies are doing amazing things and offering all kinds of products that can improve our lives and make us happier and better. But there are also some risks, especially as for-profit companies begin to enter the everyday economic spaces of households.
Here we have a Buy Now Pay Later innovation that, due to some quirks of the regulatory system, doesn’t fall under the existing regulations that we have for products like credit cards. Therefore, it is a kind of freedom of action. This is not a product expected by the financial regulatory system. What we see is that in its current version, many users perceive BNPL, who don’t really have the financial knowledge or access to resources to understand what they are using, and get themselves into financial trouble.
How can research contribute to the future of BNPL as it continues to grow in popularity?
ED: It’s no surprise that some people are worried about BNPL’s effect on consumers for several reasons. We’ve seen time and time again that when we start giving consumers easy credit, a lot of people put it to good use. But there are a significant number of consumers who fall into financial difficulties. We have seen this with mortgages. We’ve seen this with credit cards. I recently taught my students about the Sears credit card case in the 1990s and how the company got into a lot of trouble through predatory lending and then unethical debt collection practices. We have plenty of evidence that this happens repeatedly. BNPL is just another version of easy credit and we suspect some people are being harmed by it.
Regulators are obviously worried about this because this product falls through the cracks of existing regulation. I think if anyone had expected BNPL it would have been regulated by now. The current debate in the United States and around the world by regulators is not so much whether anything should be done to regulate BNPL, but rather how far those regulations should go.
Our analyzes show a pretty sharp, pretty sudden drop in leading indicators of financial health for people taking BNPL. We can’t say anything general about whether these people on the web are better or worse. It is very difficult. For example, if they use that credit to pay for baby formula, then they might be better off overall. But certainly BNPL seems to have all the leading indicators of a financial product that can cause problems for people.
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To contact deHaan for more information, contact Lauren Kirschman at [email protected]
Label(s): Ed deHaan • Admissions School of Business